Types of income elasticity of demand, Managerial Economics

Types of Income Elasticity of demand

Depending upon the product, demand might increase or decrease in response to a rise in income.  There are thus five types of income Elasticity of demand viz:

i)          Negative Income Elasticity

This is where the demand decreases as income rises and rises when income falls.  This is the case of inferior goods.

ii)         Zero Income Elastic

In this case, the demand does not change as income rises or falls.  In this case it is said to   be zero income, elasticity.  This is the case of a necessity.

iii)        Income Inelastic

This is where demand rises by a smaller proportion than income or falls by a smaller  proportion than income.

iv)        Unit Income Elasticity

 This is where demand rises or falls by exactly the same proportion as income.

v)   Income Elastic

Demand rises or falls by a greater proportion than income.  Since income elasticity of demand can be either positive or negative, it is therefore very important to include the sign (+ or -) when stating the value of the co-efficient.

Posted Date: 11/27/2012 6:38:10 AM | Location : United States







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